tn_1-56973-449-6_teaching_note_english-214cb520cac59cc5.pdf

This teaching note provides a framework for analyzing a case study involving Western Oil & Gas, a Fortune 50 company that considered a $2 million capital improvement project to install energy-efficient motor systems at its Northern California refinery in May 1997. The document guides instructors through the financial, strategic, and organizational complexities of energy efficiency projects, specifically comparing internal financing, capital leasing, and performance-based financing.

• The project became feasible through the outsourcing of technical and financial risks to Energy Services Corporation (an ESCo) and ABB Energy Capital, who provided a feasibility study and specialized project-financing expertise.
• Financial analysis of the project showed a simple payback period of 2.67 years, an Internal Rate of Return (IRR) of 41%, and a Net Present Value (NPV) of approximately $4.3 million under internal financing assumptions.
• Performance-based financing was identified as the most valuable option for Western, with an NPV of approximately $4.5 million, because it required no initial capital outlay and shifted maintenance costs to the provider.
• The use of a 'non-recourse performance-based financing' structure allowed the project to proceed by creating a single-purpose entity (SPE) to channel funding, which shielded Energy Services and Western from default risks.
• Demand-Side Management (DSM) payments from the regional utility, PG&E, acted as a government subsidy that increased the project's total value and provided Energy Services with additional leverage and incentive to implement the project.
• The document highlights that in non-competitive markets for specialized energy services, the 'free lunch' of performance financing is possible because the provider (ESCo) may prioritize relationship-building and the liquidation of DSM payments over maximizing immediate project returns.
• Sensitivity analysis indicates that the project's NPV is highly sensitive to the price of electricity, although changes in electricity prices or the Weighted Average Cost of Capital (WACC) do not alter the relative ranking of the three financing options.

APA

World Resources Institute (n.d.). tn_1-56973-449-6_teaching_note_english-214cb520cac59cc5.pdf. https://pdf.wri.org/bell/tn_1-56973-449-6_teaching_note_english.pdf

Chicago

World Resources Institute. tn_1-56973-449-6_teaching_note_english-214cb520cac59cc5.pdf. n.d. https://pdf.wri.org/bell/tn_1-56973-449-6_teaching_note_english.pdf.

Wikipedia

{{cite report |author=World Resources Institute |title=tn_1-56973-449-6_teaching_note_english-214cb520cac59cc5.pdf |url=https://pdf.wri.org/bell/tn_1-56973-449-6_teaching_note_english.pdf |access-date=17 August 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{worldresourcesinstitutendtn1569734496teachingnoteenglish214cb520cac59cc5pdf, author = {{World Resources Institute}}, title = {{tn\_1-56973-449-6\_teaching\_note\_english-214cb520cac59cc5.pdf}}, institution = {World Resources Institute}, url = {https://pdf.wri.org/bell/tn_1-56973-449-6_teaching_note_english.pdf}, urldate = {2026-08-17}, note = {Indexed by Climate Insights Directory} }